My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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  • tim@emorningcoffee.com

Week Ended June 4th: Meme stocks feature in a blah market (until Friday)

Financial markets were largely devoid of market-moving news this week, with action in the meme stocks being the only thing that livened things up just a bit, along with some generally strong earnings from a few high flyers. Aside from this action, most assets drifted sideways much of the week until Friday, when US equities managed to rediscover their mojo as equities ended the week with a strong session across the board. What little news there was that mattered this week included:


  • OPEC+ announced it would hold firm on its gradual increase in supply even as the global economy gains steam – see here from Reuters.

  • Russia announced it would remove the US Dollar completely from its $186 billion national welfare fund (NFW), to be replaced with Yuan, Euros and gold, so as to reduce its dependency on the US Dollar, since the US is considering more sanctions on the country – see article here from The Moscow Times. A CNBC article here also suggested that Russia also announced that it would consider buying oil in the future in currencies other than US Dollars for similar reasons.

  • The EU is apparently ready to finally start disbursements and capital raises under its €800 billion pandemic recovery package, as it expects to issue a €10 billion bond shortly and to disburse up to €100 billion in aid across the 27-nation bloc this year – see EURACTIVE website here.

  • The US added 559,000 jobs in May, short of economists’ expectations, and unemployment fell to 5.8%. Read more in U.S. Bureau of Labor Statistics release from Friday (June 4th) here.

  • A few high flyers released earnings this week, including Zoom Video Comms, CrowdStrike and DocuSign. Lululemon also released earnings. As has been the pattern recently, all handily beat analysts’ consensus expectations but – with the exception of DOCU – had lacklustre share performance afterwards (W-o-W performance: ZM, +1.3%; CRWD, –6.8%; DOCU, +15.7%; and LULU, +2.0%).

  • Meme stocks were clearly the focus this week, with AMC drawing most of the attention after hitting a midweek intraday high of $72.62/share on Wednesday before settling at $47.91/share to close the week (+83.4% W-o-W). I am working on a separate article on AMC simply because it is such an interesting case. There are plenty of investors making and losing a lot of money on the meme stocks, and least you think AMC is alone, GameStop (GME, +11.9% W-o-W) and Blackberry (BB, +37.6% W-o-W) were two other meme stocks that traded in high volumes this week.

Global equity markets more or less drifted sideways much of the week, until US equities rallied Friday afternoon. Japan was the poorest performing equity market and the emerging markets the best.


US equity markets exhibited a similar trend to the global indices with a slight tilt back towards value.

The Russell 2000 was the best performer on the week whilst the tech-heavy NASDAQ was the worst, as we revert back to the trend that has characterised most of the last six months or so. The Russell 2000 has in fact generated around twice the return as the NASDAQ Composite year-to-date.


US Treasury yields drifted a few basis points higher for much of the week, but US Treasuries rallied into the close on Friday as risk came back into the market, with the 10-year closing the week lower by 2bps, to yield 1.56%. It is hard to attribute this to any real inflation or growth news different than what has

been making the rounds, aside from perhaps the (slightly) weaker-than-expected jobs report on Friday. Former Fed President Bill Dudley gave an interview on Bloomberg Surveillence that is worth a watch on YouTube, here (6:33), supporting the Fed’s approach and even answering a question about AMC. Even with isolated pieces of supportive data aside, US growth is going to be very strong in 2Q2021 as the recovery strengthens, and inflation – at least temporarily – could easily drift into the 4%-5% range for two-three months, before the Fed changes its rhetoric, which it eventually will.


I included the table below to illustrate that – similar to yields on US Treasuries ­– Europe, the UK and Japan have all seen a significant increase in their underlying government bond yields YtD.

However, similar to equities in these countries, government bond yields have been largely stable for several weeks running. To provide further historical context, look back at levels every five years between 2000 and 2015 (right side of table). As you can see, borrowing costs remain at ridiculously low levels across the globe, thanks to central banks holding rates artificially low, providing ongoing stimulus. As we all know, this will end eventually, perhaps sooner than investors expect.


Credit spreads and yields on corporate bonds did not really move much either way this week, either for investment grade or high yield. Yields are lower and credit spreads tighter compared to six months ago in both US and European high yield credit. I did not notice any visible reaction to the Fed’s announcement on Thursday that it would start unwinding its corporate bond purchasing facility pursuant to the Secondary Market Corporate Credit Facility established near the onset of the pandemic (see Fed Bank of NY FAQs regarding unwind here). Originally $750 billion in size, it has been used sparingly, with the Fed’s latest report showing that the SMCCF held only $13.8 billion of corporate ETFs ($8.6 billion) and corporate bonds ($5.2 billion). For context, the US corporate bond market is around $11 trillion in size. The Fed stopped buying corporate bonds pursuant to the facility at the end of last year.


As far as safe haven assets, gold was weaker this week, perhaps not overly surprising as risk assets seemed to stage a recovery alongside the equity market towards the end of the week. Even so, gold is up 9.7% in the 2Q21 to date. The Yen has continued to weaken whilst the US Dollar, expected to drift down, seems to find levels of resilience time and time again even though the cards seem stacked against the USD.

Oil was stronger on the week, as WTI crude hit its highest close on Friday ($69.29/bbl) since the onset of the pandemic. The culprit seemed to be a policy statement by OPEC+ which indicated that the cartel would stay the course on its gradual increase in supply, even as global demand increases. Cryptocurrencies also continued to be incredibly volatile, with BTC up 3.9% W-o-W but down 37% in the second quarter. It feels to me though that BTC has found a balance between buyers and sellers around the $35,000-$37,000 level. The last thing I will even do though is predict the price of Bitcoin! Who knows?

 

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